Issue 15 – The reverse Midas touch
Tax loss harvesting worthless NFTs as a service (TLHWNFTaaS), more pilfered Pokémon, and a hard lesson that mere belief that your actions are legal doesn't mean that they are.
The holidays have brought with them a slight break from the incredible speed at which things seemed to be happening in the crypto world over the last few weeks, but only slight.
I’ve been hard at work on a year-in-review post (or maybe two), which is shaping up to be quite the conglomeration of this year’s wildest events. There have been so many that I’ve forgotten about even some of the wackiest ones, so it’s been fun to go back and review. I’m also polishing up a few new features for Web3 is Going Just Great to augment these posts, so stay tuned!
Things have been fairly quiet in the FTX department. Last we checked in, Sam Bankman-Fried had just been released on a $250 million bond to spend the holidays in Palo Alto living with his parents. Much to my disappointment, he has not started tweeting yet.
Someone with access to crypto wallets belonging to Alameda Research has started selling off a whole bunch of mostly low-liquidity altcoins, which they’ve then been laundering through various services to try to obfuscate the flow of funds. Altogether, around $1.7 million was taken. [W3IGG]. If it wasn’t for the laundering, this could conceivably be the restructuring team trying to consolidate assets. However, laundering points to this being unauthorized access to the wallets, either via another hack or by an Alameda employee who still has access that they shouldn’t. Some have speculated that this was SBF’s doing, now that he’s out of jail and with access to a computer, but there’s no hard evidence to point to that. FTX’s new CEO in charge of overseeing the restructuring, John J. Ray III, has been clear in various statements that he was not confident that his team even knew about all of the FTX/Alameda wallets, much less had secured them, so this isn’t an entirely surprising development.
There’s been a judge switcheroo in the criminal case against SBF. After realizing that her husband was a partner in a law firm that had advised FTX in 2021, and which had represented various parties who might be adverse to FTX, Judge Ronnie Abrams decided to recuse. She’s been replaced by Senior Judge Lewis A. Kaplan. Some might recognize Kaplan as the judge from various recent high-profile sexual abuse-related cases, including Virginia Giuffre v. Prince Andrew (settled early 2022) and E. Jean Carroll v. Donald J. Trump (ongoing). Others may know of him from older cases, including Chevron v. Donziger, United States v. Ahmed Khalfan Ghailani, and various organized crime cases.
Next Tuesday, Sam Bankman-Fried will enter a plea.
In bankruptcy court, an Ad Hoc Committee of Non-US Customers of FTX.com has been formed and has started making various filings. So far they have joined the motion by FTX to redact customer information, arguing that publishing customer names or other details “would cause irreparable harm, further victimizing the FTX.com customers whose assets were misappropriated” and who “never anticipated that their use of cryptocurrency and FTX.com would become publicly known.“ The committee is also seeking a declaratory judgment that assets in customer accounts belong to customers and not the FTX estate.
In the courts
An Australian court has ordered the company Kotiota to not publish their Pokémon rip-off game, stop using Pokémon branding, and quit claiming they were the development team behind various real Pokémon games. [W3IGG]
Hong Kong police have arrested two executives associated with the AAX cryptocurrency exchange, which “paused” withdrawals in November and has yet to reopen them. Police have reportedly accused them of using claims that they were undergoing software maintenance to hide the fact that they were in a liquidity crisis. [W3IGG]
U.S. authorities arrested Avraham Eisenberg in Puerto Rico, who had recently caused a $116 million loss for the Mango Markets defi project. On October 15 he admitted that he was the one behind the attack on the project, and tweeted, “I believe all of our actions were legal open market actions, using the protocol as designed, even if the development team did not fully anticipate all the consequences of setting parameters the way they are.” Evidently U.S. prosecutors believe differently. [W3IGG].
The Web3 is Going Just Great recap
There were 12 entries between December 22 and December 29, averaging 1.5 posts per day.
Midas Investments turns everything they touch into… a worthless new token
One of these days, crypto people will actually read to the end of the myth before deciding to name their projects after mythical figures. Today is not that day.
The Midas Investments defi investing platform suddenly announced to their users that not only would they be shutting down, but that they were deeply underwater. The platform revealed that it has a $63.3 million deficit caused by various bad investments and the crypto market downturn.
They announced that their solution to this insolvency would be keeping 55% of users’ Bitcoin, Ethereum, or stablecoin holdings, and instead giving those users a new token they were creating to represent some future project that they have not yet created. As you can imagine, that’s going over really well.
Midas also announced that its future project (the one with the token) would be pivoting into “CeDeFi", or "centralized decentralized finance". No, I am not joking
Collectors are down so bad they’re paying people to buy their NFTs
A project called “Unsellable NFTs” has cropped up to deal with the problem they’ve used as their namesake. In order for people to claim bad NFT investments as losses on their tax filings, this company says, people need to actually be able to sell them. However, there’s not much of a market for worthless NFTs. So, they’ve created a service where you pay them $4, and they’ll pay you $0.01 to take the NFT off your hands, complete with a receipt that is apparently supposed to be helpful with your taxes.
The Guardian was kind enough to run quite the puff piece on this operation, quoting the founders talking up their project and its utility. Their journalist did not appear to bother to ask whether a tax attorney had even been anywhere in the vicinity of this idea, or—less importantly—why they seem to be completely fabricating Twitter testimonials on their project website.
I did some quick analysis of the NFTs that have been sent to the service so far in a Twitter thread:
3Commas finally admits their API key database was compromised
After insisting there had been no security issue and that people were spreading “misinformation”, 3Commas has finally admitted that okay, fine, their API key database was hacked. At least 44 users have been confirmed to have lost a combined $14.8 million, though the actual numbers are likely much higher.
This all began in October, when several users reported losing more than a million dollars each via FTX accounts that had been connected to 3Commas. [W3IGG] Some of those users were successful in getting FTX to compensate them for the loss, though FTX maintained at the time that the issue had not been on their end. Looks like they were right.
3Commas only finally admitted that the leaked API keys had been exposed due to a security breach when someone made public the leaked database, and 3Commas was forced to admit that the API key information had come from them.
Swiss crypto broker Covario goes bust [link]
Wallets linked to Sam Bankman-Fried's Alameda Research unexpectedly begin selling off $1.7 million in tokens [link]
Mango Markets exploiter arrested despite claiming all his actions were legal [link]
BTC.com suffers $3 million attack [link]
Millions of dollars of user funds stolen in BitKeep wallet hack [link]
Rubic cross-chain exchange hacked, $1.4 million in user funds stolen [link]
Police arrest two executives of shuttered AAX exchange [link]
Defrost Finance fails to rug pull [link]
The latest Pokémon knockoff is stopped in court [link]
In the news
Tech Won’t Save Us. “FTX Goes to Zero”.
I was delighted to rejoin one of my favorite podcasts to discuss the FTX collapse, and what it means for crypto as a whole.
All Things Considered. “2022 was the year crypto came crashing down to Earth“
I joined Lee Reiners on a quick NPR radio segment by David Gura. We chatted about 2022 in the cryptocurrency industry and, of course, the FTX collapse.
Worth a read
Martin C. W. Walker. "Return to Nothingness: Big Crypto's struggles with basic accounting and economics".
In a guest post on the blog usually written by David Gerard, Martin C. W. Walker describes the financial failures that are rampant in crypto: issues with valuations, lack of balance sheets, and minimal auditing.
Columbia Journalism Review. “Journalism is a public good. Let the public make it.”
Darryl Holliday writes about his idea for public infrastructure for journalism and fact checking, and the idea of more participatory journalism. He’s also the author of a piece titled “What Journalism Can Learn from Mutual Aid“.
That’s all for now, folks. Until next time,
– Molly White